Goodyear outlines capital allocation plan changes, more debt repayment

By Paul Deckelman

New York, May 29 - Goodyear Tire & Rubber Co. announced sweeping changes Thursday to how it will allocate $3.6 billion to $3.8 billion of planned discretionary spending over the next two to three years. The changes include a $400 million increase in debt reduction efforts aimed at eventually getting the Akron, Ohio-based tire manufacturing giant back to investment-grade status, something it hasn't had since way back in 2002.

The revised capital allocation plan also calls for Goodyear to return more money to its shareholders in the form of increased dividends and share buybacks and to spend at least $500 million on construction of a new state-of-the-art tire manufacturing plant at an as-yet undetermined location to meet expected burgeoning demand in its North American and Latin American markets, particularly for more advanced and expensive high-value-added tires.

Better results drive changes

The company's executive vice president and chief financial officer, Laura K. Thompson, walked investors through the changes in the plan during her scheduled presentation at the KeyBanc Capital Markets Industrial, Automotive & Transportation Conference in Boston.

The company had originally outlined its capital allocation priorities for fiscal 2014, 2015 and 2016 last September, projecting that it expects to generate total EBITDAP - the familiar EBITDA earnings measure plus unfunded pension costs - for those three years of between $7.8 billion and $8.2 billion.

After deducting the roughly $4 billion to $4.6 billion needed to maintain the business by paying for such mandatory items as interest expense, taxes, sustaining capital expenditures on its existing facilities and working capital, Goodyear predicted that it would have between $3.6 billion and $3.8 billion of cash available to be deployed in order to "drive value," Thompson said.

This would include funds spent for purposes such as returning capital to shareholders, reducing debt obligations, including unfunded pension liabilities, "growth capex" - investment in new facilities or expansion of current facilities - and restructuring costs associated with closing unneeded or money-losing facilities or operations.

Thompson said that Goodyear generated robust results last year, including "very strong" free cash flow of over $1 billion, leaving the company sitting on over $3 billion of cash at year's end. It used about $1.1 billion to fully fund its two pension plans for its hourly workers in the United States. Thompson declared that "we froze and de-risked those plans, eliminating the volatility and the uncertainty that goes along with having those plans."

Besides improving its U.S. pension situation, Thompson said the company had made "substantial progress" in reducing its overall global pension liabilities. According to data prepared by the company for use with her conference presentation, Goodyear's total unfunded pension liabilities, including both its global plan and its U.S. plan, had come down to $1.85 billion by the end of 2013 from $2.55 billion in 2010 and a peak level of $3.52 billion at the close of 2012.

Debt reduction a priority

With the already budgeted-for $1.1 billion obligation for its U.S. pension plans now taken care of out of cash already on hand - as opposed to cash it would expect to generate over the next three years - Thompson said that Goodyear could reallocate the $3.6 billion to $3.8 billion, including the additional $400 million earmarked for debt reduction, "further strengthening our leverage metrics -a very critical priority for the company."

According to the company data, as of the end of 2013, Goodyear had total adjusted debt, which the company defines as debt adjusted to include its domestic and global pension liabilities, of $8.1 billion. That was up from $7.29 billion at the end of 2010 but down from a peak level of $8.6 billion at the end of 2012. While pension liabilities have declined over the past several years, long-term debt plus capital leases has steadily risen since 2010 - but so have earnings, letting Goodyear's leverage ratio gradually decline.

That leverage ratio of total debt plus unfunded global pension liabilities as a multiple of net EBITDA plus net periodic pension cost, rationalization charges and other income or expense stood at 4.3 times at the end of 2010 and 4.1 times at the end of 2012 but had declined to 3.4 times at the end of 2013.

"Our original plan in September 2013 targeted getting us to a 2.3 to 2.5 times leverage target, and that got us into the ballpark," the CFO said.

"What we want to do with the additional $400 million is accelerate that path," bringing the leverage measure down to about 2.4 to 2.5 times by the end of 2015 and finally getting to a 2.0 or 2.1 times leverage target by the end of 2016.

Goodyear, she said, "is advancing our path to investment-grade credit ratings," calling the achievement of such status "a commitment that we have."

The company said that improving the balance sheet that way would yield tangible benefits, including reducing its cost of capital, improving its global access to credit, giving it greater ability to move debt overseas and the ability to reduce needed cash balances.

More shareholder cash possible

Thompson told the conference attendants that "historically, a disproportionate amount of our cash went to pension funding, but as we move over time, obviously, that's much less of an issue."

She said that once the company pays down its debt "and gets to the leverage targets we want to achieve" by the end of 2016, "we don't necessarily need to go any further, and we see a shift even more likely to shareholder return programs over time."

For now, she said Goodyear is allocating an extra $400 million from the $1.1 billion not going to pension paydown to improving shareholder value, including an increase in its share buyback program to $450 million from the $100 million repurchase program put in place last year.

Its quarterly dividend on the company's estimated 248 million shares, which was first reinstated last year after having been suspended some years ago, will be raised to 6 cents from the current 5 cents, or 24 cents annually rather than 20 cents, effective for the September dividend.

And she noted that "we have the opportunity to increase the dividend or the share repurchase over time, depending on the performance of Goodyear."

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